A Precedent for Ending Big Tech’s Monopoly

During the time of the Roman Republic, Cato the Elder would end every speech in the Senate, no matter what the topic, with “Carthago delenda est.” Carthage must be destroyed. Why? Because Cato saw Carthage as a very real and existential threat to the Roman Republic. In many ways, the tech monopolies today are a very real threat to our American Republic. And so the tech monopolies must be broken up—destroyed. The question is not if they should be broken up, but how.

A smart man once told me, “Ned, the tax code and regulations are not rocket science; they are actually history and political science.” It is, in fact, in the history of key tax cases and Treasury regulations—some dating back 40 years—where we can find illumination about how to confront the growing threat of Big Tech.

Let’s first look at the 1992 U.S. Supreme Court decision in INDOPCO, Inc. v. Commissioner. In 1977, Unilever expressed interest in buying out what was then called the National Starch and Chemical Corporation, later renamed INDOPCO. In expectation of being acquired, INDOPCO hired Morgan Stanley to be its investment banker. Morgan Stanley’s fees of $2.2 million, in addition to some other expenses, were written off as deductions by INDOPCO.

The IRS commissioner, however, took exception to that, claiming that the Morgan Stanley expenses were not deductible as Morgan Stanley’s work, in fact, was a long term asset as it “prettied” INDOPCO up and made it more valuable. Instead of a deduction, the $2.2 million needed to be classified as a long term asset and amortized over time.

The case wound its way through the courts for about 15 years until it finally reached the U.S. Supreme Court. In a rare unanimous ruling on a tax question that the court deals with infrequently, justices such as liberal Harry Blackmun and conservative Clarence Thomas agreed that “that expenditures incurred by a target corporation in the course of a friendly takeover are nondeductible capital expenditures.”

Out of the ruling came Treasury regulations 1.263(a)-4(b), which require the taxpayer to capitalize, not deduct, listed intangible assets. Under the regulations, the taxpayer must capitalize, among other things, “Amounts paid to acquire or create intangible assets” and “Amounts facilitating the acquisition or creation of intangible assets.” An intangible asset is “A non-financial asset that does not have physical substance but is identifiable and controlled by a company through custody or legal rights . . . customer list database is an intangible asset.”

Advertising or Assets?

In the wake of the 1992 ruling, the IRS pursued other cases against corporations and their advertising, including Gillette, Kraft, and others, arguing that anyone building intangible assets through advertising should be forced to amortize, not deduct those expenses. The IRS lost most of the cases, as the value of advertising via a public medium was hard to quantify.

But things have changed now. There is a very real way to quantify precise value and quite frankly there is a real conversation about whether Google and Facebook ads are truly advertising. The question becomes are companies really even advertising through Google or Facebook? Or even marketing? Or are they actually building direct assets via the tech companies, e.g., data that the companies acquired from individuals to know exactly where someone is, what they want and then deliver that product directly to them?

That is really the tech business model: to know where someone is located, what they want, offer up what they want, all while the tech companies have been getting the data for free to target people, to then sell them goods. So what has been called “advertising” through the tech companies is really just highly targeted customer acquisition. That isn’t advertising at all. It’s building long-term assets for a company.

Where it gets interesting with all of this is that the tech companies will say Google and Facebook ads are really just advertising in a public medium. So what is it? They cannot have it both ways.

Anyone with a few brain cells and some common sense knows that these companies are not neutral platforms, yet they want to operate under the Section 230 exemption of the 1996 Telecommunications Act. In reality, of their own volition and by very distinct decisions, they operate as publishers and telecommunications companies.

Killing the Business Model

Using the question of determining whether ads are advertising via a public medium or truly just customer acquisition would box Big Tech into a corner: if companies using tech companies’ ads would have to adjust and claim all of that advertising money is actually the building of a long term asset, it would destroy the tech companies’ business models overnight, potentially cut their revenue in half, and open the market to more competition.

If, however, it’s determined that the ads are more in line with advertising on a public medium, then the tech companies would fall under the purview of the Federal Communications Commission and likely the Federal Trade Commission—oversight they are desperate to avoid.

The tech monopolies are a very real and present threat to our freedom. It cannot be stated strongly enough: if the tech monopolies are left in their current form, our republic and our freedoms are over. Anything and everything that will break their power, including antitrust suits, should be pursued.

But remember, it wasn’t something sexy that brought down Al Capone, one of the most notorious gangsters in our history. It was tax violations. The same approach could be used with the tech companies: all Steve Mnuchin must do is issue a Treasury edict that makes this issue of building intangible assets a Tier 1 audit issue, which means every auditor must look at advertising expenses not as deductions, but as long term capital assets.

These tech monopolies were allowed to come into existence because of gray areas and advantages created in law and tax regulations. Only law and regulation can bring them to heel.

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About Ned Ryun

Ned Ryun is a former presidential writer for George W. Bush and the founder and CEO of American Majority. You can find him on Twitter @nedryun.

Photo: Getty Images

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